Email this article to a friend

Equity investors were this week dealt a harsh lesson in the danger of surfing social media channels for market tips, when two US companies fell victim to hoax defamatory tweets that sent their share prices crashing.

On Tuesday, shares in Audience, a Nasdaq-listed US manufacturer of computer chips, plummeted by 25% after a tweet claiming to be from influential equity research firm Muddy Waters said the chipmaker was being investigated by the US Department of Justice over allegations of fraud.

Having opened Tuesday at $11.88, the shares fell sharply in mid-afternoon trading to a low of $8.87, before recovering to close up at $12.38.

Then on Wednesday, shares in US pharmaceutical firm Sarepta Therapeutics fell by almost 10% in a matter of minutes following a tweet purporting to be from another research firm CitronResearch, which alleged Sarepta had manipulated the results of various drug trials.

The sharp nature of the falls, which both took place in a matter of minutes, suggested they were driven in part by sell orders from trading programs directly on the information. These automated trading strategies involve algorithms buying and selling shares based on the market sentiment surrounding a stock detected across a range of media including social networking sites such as Twitter.

Muddy Waters quickly issued a response via its official Twitter account advising its followers that the tweet regarding Audience was a hoax. Andrew Left, who runs CitronResearch, confirmed his firm was not responsible for the tweet on Sarepta, according to Reuters.

The use of Twitter for trading is gaining ground, as firms seek out new ways of gaining an insight into the mood and direction of the market. The phenomenon has given birth to new technologies which detect abnormal signals in the Twittersphere and analyses them, together with contextual data, to ascertain if the chatter is meaningful or simply noise.

An investor armed with such technologies who did not believe the tweet was genuine, or who considered the price dive an overreaction, could have viewed the Twitter hoaxes as a buy-in opportunity. A trader who entered a long position in Audience when it hit a low of $8.87 and sold at the session high of $12.45 would have made a notional gain of 28.8%, or $3.58 per share.

Oli Freeling-Wilkinson, a former UniCredit trader who founded Knowsis, a firm which tracks market sentiment around share prices on twitter, said investors have to be discerning when filtering Twitter chatter. He said they should pay close attention to whether a tweet appeared to be an isolated message, especially on more illiquid, thinly traded stocks which tend to be subject to more erratic market moves.

He told Financial News: “As well as looking at sentiment, it’s important investors look at the volume of conversation around a stock. Are you trading on crowd sentiment, or the Twitter equivalent of overhearing two guys talking in a pub?”

The highly networked nature of Twitter means both good and bad information spreads quickly on the platform. Putting the $ sign in front of a stock’s ticker code on Twitter allows investors to automatically track individual stocks and the information written about them. Twitter users can also set up automated searches to find tweets containing the code, which also allows information on that stock to be quickly republished.

In the case of Audience, the false tweet came from an account set up to look like the personal profile page of Muddy Waters but the use of its “$ADNC” Twitter ticker meant all followers of that stock were exposed to the hoax.

The hoax drew an angry response from equity investors that fell for the ruse. One, Steve Odberg, replied to the genuine Muddy Waters from the account @Bullltalk: “Hope whoever did it does time. I fell for it and a few others did because your reports have quite an effect."

A spokeswoman for Audience said the firm was not aware it was the subject of any Department of Justice investigation. In an official statement, Sarepta said: "While we do not comment on such rumours, we believe it is important to remind our shareholders that Sarepta communicates material information in accordance with our obligations as a public company."